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This paper shows how the fast Fourier Transform may be used to value options when the characteristic function of the return is known analytically.
A three parameter stochastic process, termed the variance gamma process, that generalizes Brownian motion is developed as a model for the dynamics of log stock prices. The process is obtained by evaluating Brownian motion with drift at a random time given by a gamma process. The two additional parameters are the drift of the Brownian motion and the… (More)
This article provides the economic foundations for valuing derivative securities. In particular, it establishes how the characteristic function (of the future uncertainty) is basis augmenting and spans the payo! universe of most, if not all, derivative assets. From the characteristic function of the state-price density, it is possible to analytically price… (More)
P robably one of the most successful interfaces between operations research and computer science has been the development of discrete-event simulation software. The recent integration of optimization techniques into simulation practice, specifically into commercial software, has become nearly ubiquitous, as most discrete-event simulation packages now… (More)
Three processes re°ecting persistence of volatility are formulated by evaluating three L ¶ evy processes at a time change given by the integral of a square root process. A positive stock price process is then obtained by exponentiating and mean correcting these processes, or alternatively by stochastically exponentiating the processes. The characteristic… (More)
The decade of the nineties witnessed a significant increase in business-level strategy research relating to the competitive actions and reactions carried out among competing firms. Rooted in the Schumpter' theory of creative destruction, this work has examined causes and consequences of firm-level action and reaction, such as new product introductions,… (More)
We survey the developments in the ¯nance literature with respect to pricing default. A broad description of the issues is follwed by a detailed summary of the main points and features of the models proposed. Both option theoretic and hazard rate models are presented and critically reviewed .
1 The authors contributed equally to the writing of this paper and are listed alphabetically. An earlier version of this paper was presented at the micro-economics workshop at Purdue University. We would like to thank ABSTRACT The results of this study provide insight into why some universities generate more new companies to exploit their intellectual… (More)
A working paper in the INSEAD Working Paper Series is intended as a means whereby a faculty researcher's thoughts and findings may be communicated to interested readers. The paper should be considered preliminary in nature and may require revision. Abstract Knowledge is a broad and abstract notion that has defined epistemological debate in western… (More)
This article develops a framework that applies to single securities to test whether asset pricing models can explain the size, value, and momentum anomalies. Stock level beta is allowed to vary with firm-level size and book-to-market as well as with macroeconomic variables. With constant beta, none of the models examined capture any of the market anomalies.… (More)